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When investors feel good, the S&P 500 can take off like a rocket. This was certainly the case in 2024, when the US benchmark stock index rose 23%.
It wasn't just the tech giants like NVIDIA, teslaand amazon that skyrocketed in value. S&P 500 stocks rose on hopes of sustained interest rate cuts that would boost growth and, by extension, corporate profitability.
But what soars when confidence rises can crash when optimism wanes. This has been the story so far in 2025, with investors questioning the prospects (and lofty valuations) of companies that rose last year.
According to XTB analyst Kathleen Brooks, “Momentum and growth had been powerful drivers of the S&P 500's rally in 2024 (but) have now reversed.“.
This change has seenbest performing value stocks“Stock growth and momentum in recent days,” Brooks noted. She added that “It's too early to tell if this is a trend, but it's definitely something to pay attention to.“.
Growing pessimism
US stocks are selling off for a variety of reasons, including:
- Signs of persistent inflation that may limit global interest rate cuts.
- Strong US economic data that could moderate rate cuts by the Federal Reserve in particular.
- New fears about China's economy.
- Concerns over US President Trump's immediate new trade tariffs.
Some of these concerns are not new. However, the huge valuations of S&P 500 stocks are causing investors to reevaluate whether current stock prices accurately reflect the risks and challenges ahead.
The forward-looking price-to-earnings (P/E) ratio for S&P 500 stocks is currently 29.5 times.
In this climate, it is perhaps not surprising to see a rebound in demand for US value stocks. Low valuations leave ample margin of safety in case of earnings shocks related to macroeconomic events.
A value share to consider
As a long-term investor, my bullish view on the S&P 500 remains intact. History shows that stock prices always rebound after a crisis. And I expect the U.S. stock market to continue its decades-long rise, fueled by ongoing technological innovation and the great national economy.
However, I can take steps to strengthen and protect my portfolio by adding some value stocks. Alphabet (NASDAQ:GOOG) is one that I think deserves serious consideration today.
By 2025, the Google and YouTube owner trades with a forward P/E ratio of 21.8 times. This is comfortably below the S&P 500 average of nearly 30 times.
It's also some way off the average of 47 times for the index's broader information technology sector.
Alphabet's cyclical operations leave it vulnerable during economic downturns. It also faces increasing competition from other search engines and social media providers.
However, the tech giant also has considerable growth potential as the digital economy continues to expand. I am particularly surprised by its progress in the field of artificial intelligence (ai) and its potential in other growth sectors such as cloud computing and autonomous vehicles.
In the current climate, I think buying cheap US stocks like this is a great idea to consider.
